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Sichenzia Ross Ference Carmel LLP Litigation Partners Michael Ference and Scott Furst Resolve SEC Enforcement Action After Securing Broad Dismissal of Securities Law Claims And Handing SEC A Rare Defeat On Section 5 Liability

Press Release – New York, NY – May 13, 2024 – Led by Partner Scott Furst, Sichenzia Ross Ference Carmel LLP (“SRFC”) won successive victories for their client, when, in January 2020, Southern District of New York Senior Judge Loretta Preska dismissed all fraud-based securities and control person liability claims brought by the Securities and Exchange Commission (“SEC”) against their client in S.E.C. v. Magna Equities II, LLC, et al., Case No. 1:19-cv-01459 (LAP).  In May 2023, Senior Judge Preska then handed the SEC an incredibly rare defeat on its motion for summary judgment on its theory that their client had violated Sections 5(a) and 5(c) of the Securities Act of 1933 (“Securities Act”).  These events provided the foundation for a recent favorable resolution for their client.

Section 5(a) and 5(c) of the Securities Act make it unlawful to offer or sell a security in interstate commerce unless a registration statement has been filed or the transaction qualifies for an exemption from registration.  Section 5 is a strict liability statute; the SEC is not required to prove scienter.  Consequently, degrees of fault, negligence and intent are irrelevant to determining liability.  Moreover, Section 5 does not limit liability to the initial distribution of securities, and liability under the statute extends to participants in the sale who were both necessary for the transaction and a substantial factor in bringing it about.

The SEC alleged that SRFC’s client, through related entities, had obtained unrestricted shares of two publicly-traded companies and then caused those shares to be sold into the market without any exemption from the registration requirements of the federal securities laws.  A significant part of the SEC’s case relied on the acts and testimony of a convicted, serial fraudster, Zirk de Maison, who was already serving more than twelve (12) years in prison and had been ordered to pay in excess of $39,000,000 in restitution for his role in an unrelated massive, penny-stock scheme.  Mr. de Maison sought cooperation credit from the U.S. Attorneys for the Northern District of Ohio as well as the SEC, and in that context, the SEC built its lawsuit against the defendants.

Mr. Ference said, “Federal courts often defer to the SEC’s allegations at the pleading stage of an enforcement action, and follow a long line of cases that have, on lesser fact allegations, allowed SEC cases to go forward based on inferences of scienter that is below what many private litigants must show in civil litigations that do not involve the SEC.  The SEC, however, is not a typical civil litigant.  Its pre-action investigatory powers and tools have no analog in ordinary civil litigation.  The SEC has the resources and discretion to expand its investigatory focus, to abandon its prior theories and to saddle anyone in the SEC’s focus – even when the SEC lacks any focus whatsoever – with unprecedented and often-crippling costs: legal, financial and reputational.  It’s simply extremely difficult and expensive to fight for fairness and to defeat the SEC when the pre-action investigation can drag on for years before a lawsuit even starts.  Few individuals and entities in the United States have the resources and resolve to fight and the right attorneys to stand by them and fight for every fact and every win.”

The SEC alleged that Magna’s founder was individually liable for violating Section 17(a) of the Securities Act and Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder and Section 20(a) of the Exchange Act.  The Court, however, rejected each of the SEC’s claims as a matter of law.  SRFC’s client was the only defendant to win dismissal on these claims.  

Following years of extensive and contentious fact discovery, in May 2023, Judge Preska issued an eighty-six page Opinion and Order that, in relevant part, handed the SEC an incredibly rare summary judgment loss on its Section 5 claim against the founder after crediting the “conflicting nature of the evidence” developed and presented by SRFC.  Under the circumstances, the Court concluded that there was a “genuine dispute of material fact” as to whether the founder was a “necessary participant and substantial factor” in the unregistered securities sales.

 “From the outset, we told the SEC that this was an extraordinary overreach to bring an enforcement action against the founder that was not supported by facts but was, in large part, premised upon the self-serving claims of a convict.  Almost no one has the emotional and financial reserves to fight for that long.  Still, although delayed, justice was not denied.  We are especially gratified that Judge Preska’s detailed analysis presents a “roadmap” of what is demanded to deny the SEC judgment on Section 5 liability.  This was the right result.”

The SEC’s lawsuit was recently resolved with no determinations of fraud, control person liability, Section 5 liability, penalties, penny stock bar or joint and several liability against Magna’s founder.  

SEC v. Magna Equities II, LLC, 433 F.Supp.3d 496 (S.D.N.Y. Jan. 14, 2020); SEC v. Magna Equities II, LLC, No. 1:19-cv-01459 (LAP), 2023 WL 3260032 (S.D.N.Y. May 4, 2023).

Sichenzia Ross Ference Carmel LLP is a full-service law firm with a nationally-recognized corporate, securities and litigation practice that provides experienced representation in all matters involving the securities industry.  In addition to handling routine to complex commercial matters, SRFC’s litigation practice specializes in representing public and private companies, private funds, investment banks, broker-dealers, investment advisers, placement agents, directors and officers, special committees, and corporate and individual investors in securities and commercial litigation, arbitration, regulatory actions and enforcement defense, including class action lawsuits, shareholder derivative actions, and matters involving allegations of fraud, misrepresentation or other securities violations.  The firm complements its core practice areas with an established tax, commercial real estate and trusts and estates practice.